Earnings management is now a very common term in financial reporting. It refers to some of the management practices whereby accounting items are presented in a manner to achieve a certain economic outcome. The treatment of such accounts may or may not be in accordance with all relevant accounting principles and standards. It is believed that the auditor should have a role in detecting earnings management and in determining the extent of the ‘manipulation’ in arriving at an appropriate audit conclusion.

Required

1. Discuss the meaning of earnings management and how it affects the final stages of a financial report audit.

2. Identify means whereby the auditor may reduce earnings management.

You should undertake research on earnings management and its relationship with the role of the auditor.